Nobody wants to get in trouble with the IRS, but there is help available for people who are dealing with fines and penalties. While it may be possible to reduce you overall tax bill and arrive at a reduced settlement, it is far better to avoid the audit and fines to begin with. The first step in avoiding an audit is learning what the IRS looks for and what activities can trigger an audit.
Forgetting to Claim Income
It is not just up to you to report your income. Employers are required to report the earnings of independent contractors and their employees. Additionally, people may also claim payments made to you if they’re tax deductible. In addition to reporting income, you must also report dividends, interest income, and other earnings. Failure to do so will result in penalties, fines, and possibly an audit.
Excessive or Creative Business Expenses
There is a bit of leeway when it comes to business expenses, but you should take care with every deduction. Occupational codes are routinely used to determine what’s normal and what may be excessive. If your expenses are not in line with your industry, the IRS may decide to take a closer look. In general, take care not to mix business and personal expenses to avoid problems. You should also be meticulous with your documentation so that you can justify every deduction and avoid fines.
The government routinely audits people with earnings in excess of $200,000. Its estimated that they audit only one percent of people earning below this amount, but four percent of the people who earn more than this. Additionally, they audit roughly 12.5 percent of the returns for people who are making one million dollars a year or more.
Owning a Cash-Intensive Business
Some businesses just deal more in cash. These include car washes, hair salons, and restaurants. The cash natural makes it easier for people to hide earnings, so the IRS tends to look more closely at these industries. They also more closely at S corporations and LLCs where income flows directly through to the proprietors. However, you can protect yourself by claiming all income and keeping accurate records to support deductions.
Being Overly Generous
The IRS knows all about different averages, and that includes the average size of charitable donations for people in your income bracket. If your donations seem excessive, then it could trigger a full audit. As with other decisions, you should protect yourself by holding on to your documentation.
Failing to Report Foreign Bank Accounts
New programs are in place that make it easier for the IRS to find out about money stashed overseas. These tax havens will report to the IRS, and that can leave you facing an audit and serious penalties. Once a bank is identified as providing people with amnesty, the IRS may target that institution to get the names of other account holders. Your best bet is to attach Form 8938 and report the assets in overseas accounts
Erroneous Data Entry
Sometimes, a mistake is nothing more than that. However, a simple error in your data entry can still lead to an audit because the government will want to see if there are other mistakes. It is important to pay close attention to detail with your return and double-check all of the information before you have it filed. Even if you turn the forms over to a CPA, you should still take the time to look through the return and see if anything raises red flags to you. If you have concerns about some information, it is highly likely that the IRS will also have some concerns.
Follow these tips to avoid an audit and protect your finances. Even if you are not penalized with heavy fines, you will still have the time consuming and stressful process to contend with. If you are audited, attorney Mary King help you navigate the waters and negotiate the IRS and work to minimize your losses.